The Fed Picks Up The Pace

Patience, we are taught, is a virtue. Good things come to those who wait. Look before you leap. Haste makes waste. There are a host of adages that advise us to reflect, so as not to be rash.

This is the approach the Federal Reserve took for most of 2021. They remained relaxed, even amid mounting evidence that more urgency was needed. As the year ends, however, the Fed has been forced into a change of pace.

Inflation around the world has been rising rapidly. Year over year changes in the price level now stand at nearly 7% in the United States, more than 5% in Britain, and more than 4% in the euro area. While each market has idiosyncratic factors at play, all have been affected by elevated prices for housing, supply chain disruptions, and rising labor costs. As we noted last week, inflation is the top story we covered in 2021.

When price increases first began to accelerate, they were largely viewed as the product of temporary imbalances between demand and supply. Pandemic-related stimulus has been massive; at the same time, the pandemic has constrained the availability of goods and labor. But those conditions weren’t expected to last; high prices tend to attract more supply and curb demand, leading to more settled conditions.

Central banks embraced this thesis more tightly than most. Not without reason: for most of the last decade, higher inflation was often expected, but never materialized. Powerful secular factors kept prices in check, anchoring inflation below the commonly-targeted level of 2%. The fear of deflation became more prominent than the fear of inflation. And so the printing presses pressed on; excess liquidity pooled throughout the economy.

Weekly Economic Commentary - Chart 1